Valuing Uncertainty and Building Maximum Viable Products
Profit arises out of the inherent, absolute unpredictability of things, out of the sheer brute fact that the results of human activity cannot be anticipated.
- Frank Knight in his 1921 book Risk, Uncertainty, and Profit
In 2008 if you were to build a successful hotel booking website you would earn a slice of the total commissions hotels pay out to booking agents and travel websites globally. That’s pretty straightforward. But what would you expect to earn if you were the founders of Airbnb, building a website that lets people rent out their spare bedrooms to strangers?
In defined markets comparable businesses and standardized pricing models provide clarity around an opportunity’s intrinsic value but how do category creating entrepreneurs, where there are no priors, test and understand a business model and the market opportunity?
Build a minimum viable product to learn how big your market is and then build a maximum viable product to learn what it’s worth.
Used to Have a Little Now I Have a Lot
Most people reading this have likely heard of a minimum viable product or MVP: the minimum set of features required to solve a problem. An MVP is a bare minimum product designed to be delivered to customers as quickly as possible. A lot can be learned from an MVP and ultimately, the minimum viable product proves your market — if customers are willing to pay you for the bare minimum then you’re probably onto something.
The problem with the minimum viable product is that you can’t measure what you’re missing. If customers can’t do something with your product or service, it will be virtually impossible to measure their intended product usage and harder still to value it.
The maximum viable product (MaxVP) inverts the framework, captures the potential upside and provides a clear roadmap for both your product and business model.
Ship Early, Ship Often
Our model is simple: customers rent batteries from solar powered kiosks called Hubs, take them home and use them to power appliances, lights and mobile phones. At our first Jaza Hub we launched our service as an MVP, some motorcycle batteries and cables our CTO crimped by hand, long before we built a lithium-ion battery pack. In a previous post I wrote about how we stopped listening to our customers, but started hearing what they were actually saying to get to product/market fit. With our MVP we learned what features were important to our customers and developed a business model that was worth repeating.
After we launched, our customers asked for larger batteries but we knew if we shipped a larger pack we would have to raise prices and our service would reach fewer customers. The majority of our customers make less than $2 a day and what our customers were actually saying was that if they were going to spend a day’s wage on a swap, the battery better last a long time. The transaction cost was too high.
In our next product iteration, we reduced the battery capacity, added an expiry time for the stored energy and reduced the transaction price.
By creating a daily transaction we were able to meet the daily income pattern of our customers. Over the past few months we’ve increased our customer acquisition rate by a factor of ten and have received record high levels of customer satisfaction.
After we got something that worked, we set out to discover what to build next and to determine the potential of our market.
Measure What Matters
Entrepreneurs are taught to launch early and often — testing and iterating against a clearly articulated value hypothesis. I believe that our customers will do X and we will earn Y. But here’s the thing, you can’t measure what isn’t happening.
That’s why we are now prototyping a maximum viable product, or MaxVP. Where previously we reduced features and capacity to reach the mass market, now we’re maxing out select features to test the limits of customer value. This doesn’t mean we are building everything under the sun — the key word here is viable — we are prototyping a product that can demonstrate the maximum usage of the features that our customers valued through the development of our MinVP.
If your MinVP is a 1 Star solution, your MaxVP should be an 11.
The 11-Star Overnight Stay
Airbnb epitomizes both a market creating opportunity and the MinVP/MaxVP framework. The founders of Airbnb took a crazy idea (letting strangers stay in your house), listened intently to their users (traveled to NYC to stay with early hosts) and built things that didn’t scale (used their art school skills to photograph listings and then cross posted them on craigslist).
They then inverted the process to start designing a truly mind-blowing, “tell everyone you know” type of product.
Here’s Airbnb’s founder Brian Chekskey talking to Linkedin founder and venture capitalist Reid Hoffman
We basically took one part of our product and we extrapolated: what would a 5-star experience be? Then we went crazy. A 5-star experience is: You knock on the door, they open the door, they let you in. Great. That’s not a big deal. You’re not going to tell every friend about it. You might say, ‘I used Airbnb. It worked.’
So what would a 10-star check in be? A 10-star check in would be The Beatles check in. In 1964. I’d get off the plane and there’d be 5,000 high school kids cheering my name with cars welcoming me to the country. I’d get to the front yard of your house and there’d be a press conference for me, and it would be just a mindf**k experience. So what would an 11-star experience be? I would show up at the airport and you’d be there with Elon Musk and you’re saying: ‘You’re going to space.’
What Comes Next
Power begets power and as our customers use more energy demand grows. We are developing a way to determine how much energy our customers will use over time and how much they will pay us for it.
We’re going to 6X the amount of energy in a select number of packs/Hub and measure how much energy our customers use if energy isn’t a limiting factor. Now that we know how to price and deliver our service the sky’s the limit, but we still want to know how high up the sky is, and how much our customers will pay for it.
We now have a way to quickly acquire customers and to understand all of their needs — a valuable tool in the market creation game.
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If you like this type of thing, you can read all my Medium posts here or follow me on twitter. More on Jaza here.
Also thanks to geetha thurairajah and Sebastian Manchester for reading and improving earlier versions of this post.
